Objective information about retirement, financial planning and investments

 

Choosing A Financial Advisor? – Ask These 6 Questions

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Deciding to hire a financial advisor can be a tough decision for many investors. Once you’ve made this decision, how do you go about finding the right advisor for you?  Here are six questions to ask when choosing a financial advisor: 

Madoff, Looking the Other Way

How do you get paid?

Fee-only advisors receive no compensation from the sale of investment or insurance products. When selecting a financial advisor, ask yourself whether you feel that a financial advisor who receives a significant portion of their compensation from the sale of financial products can really be counted on to recommend solutions that are in your best interest?

Where will my money be housed?

One of the tactics used by Bernard Madoff to perpetrate his fraud was to send clients his own statements instead of statements generated by a third-party custodian like Charles Schwab, Fidelity, TD Ameritrade, and others.  A third-party custodian provides periodic (monthly or at least quarterly) statements independent of any reports provided by the advisor.  You should never give your investment dollars directly to a financial advisor, they should always be sent directly to the custodian.

This is critical if the advisor will be providing on-going investment advice.   In fact it is a deal-killer if this is not the arrangement.  If the advisor says something like “… we send out our own statements to our clients…”  end the conversation and find another advisor.

Are we the exception or the norm for you?

Ask your financial advisor about their client base. If you are a corporate employee looking for help planning for the exercise of your stock options, you should ask the adviser about their knowledge and experience in dealing with clients like you.  A financial advisor who deals primarily with teachers or public sector employees might not be the right choice for you. Likewise if the advisor’s typical client has a minimum of $1 million to invest and your portfolio is more modest, this advisor might not be a good fit for you.

What can you do for me?

If the advisor’s primary service is focused in an area like constructing bond portfolios for their clients and you are looking for a financial planner to construct a comprehensive financial plan for you, this advisor may not be a good match.  Make sure to find someone who offers the types of services and advice that you are seeking.

What are your conflicts of interest?

Financial advisors who are registered representatives will often be incentivized to sell insurance or annuity products promoted by their broker dealer or employer.  Ask how they select the financial and investment products they recommend to clients. Ask them directly about ALL forms of compensation they will receive from working with you, and if they will disclose this information on an ongoing basis. Ask them if there are any restrictions regarding the products they can recommend.

Do you act in a fiduciary capacity towards your clients?

In laymen’s terms, you are asking if the adviser is obligated to put your interests first. The brokerage industry uses the suitability standard, but in my opinion this falls far short of a true Fiduciary Standard. This argument continues in the financial services industry as the regulators work through this issue.

The questions listed above are just a few of the many questions you should ask when choosing a new financial advisor or to ask of an advisor with whom you currently have a relationship. As an investor, it is ultimately up to you to select the right financial advisor. Do your homework and due diligence. Your financial future could depend on your choice.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

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4 Reasons to Accept Your Company’s Buyout Offer

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4 Reasons to Accept Your Company’s Buyout Offer

Companies will use buyout packages for groups of employees from time-to-time to provide those employees an incentive to leave the company. The company may have a variety of reasons behind their desire to reduce their workforce, such as reducing expenses or realigning business units.

Many companies offer employees a buyout package to encourage them to leave the company. This is generally done to encourage voluntary departures when the organization is looking to reduce headcount. These offers can cover employers across all levels of experience, but are often structured as early retirement packages geared to older workers. Over the years I’ve been asked by Baby Boomer clients and friends whether they should accept this offer from their company. Almost without exception I’ve encouraged these folks to take the money and run. Here are 4 reasons to accept your company’s buyout offer.

There’s a target on your back 

If your company has identified you as somebody who might be a good candidate for a buyout offer this generally means you are on their list. In my experience I’ve invariably seen folks who have turned down the first offer finding themselves out of a job within a year or so.

The first offer is likely as good as it’s going to get 

A number of years ago a friend called me to discuss a buyout offer he had received from his employer, Motorola. Given his age and the favorable terms of the buyout offer I strongly encourage him to take the package. He ended up not taking the offer and stayed with the company for a bit over a year afterwards. Sadly, he was let go and the financial terms of his separation were not nearly as favorable as they would have been had he taken the initial buyout.

Sweetened terms and incentives 

Every situation is different, but I’ve seen buyout offers that included such incentives as extended medical coverage, years of service added to a pension calculation, and additional severance pay over and above what an employee would have been entitled to based upon their years of service. Additional incentives might include training and job search help.  In many cases these buyouts can be incentives for older workers to take early retirement and the incentives are geared to areas like the ability to receive early pension payments.

This could be a great opportunity

While most people don’t like the idea of losing their job, a generous buyout might be a great opportunity for you. If you will continue to work and you are able to find a new job quickly the buyout could serve as a nice financial bonus for you. This situation might also serve as an opportunity to start your own business. If you were looking to retire in the near future this could be just the opportunity you were looking for.  I’ve had more than one client over the years joyously accept their company’s early retirement incentive.

In analyzing whether to take the buyout you should at a minimum consider the following:

  • Your current financial situation, what impact will this have on my overall financial plan and my goals such as retirement and sending my kids to college?
  • What you might do next:  Retirement, self-employment, look for another job
  • If you will stay in the workforce what are your employment prospects?
  • Health insurance options.
  • How good are the incentives being offered?  Can you or should you try to negotiate a better package?

Corporate buyouts and early retirement packages are clearly here to stay.  If you are a corporate employee, especially one in the Baby Boomer or the Gen X age range, you should give some thought to what you would do if this situation were to present itself.

Were you offered a buyout or early retirement package? Do you need some help evaluating it? Do you need an independent opinion on your investments and where you stand in terms of retirement? Check out my Financial Review/Second Opinion for Individuals service. 

NEW SERVICE – Financial Coaching. Check out this new service to see if its right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

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401(k) Fee Disclosure and the American Funds

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With the release and subsequent repeal of the Department of Labor’s fiduciary rules for financial advisors dealing with client retirement accounts, much of the focus in recent years has been on the impact on advisors who provide advice to clients for their IRA accounts. Long before these rules were unveiled and then repealed, financial advisors serving 401(k) plan sponsors have had a fiduciary responsibility to act in the best interests of the plan’s participants under the DOL’s ERISA rules.

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Starting in 2012, retirement plan sponsors have been required to disclose the costs associated with the investment options offered in 401(k) plans annually.

As an illustration, here’s how the various share classes offered by the American Funds for retirement plans stack up under the portion of the required disclosures that deal with the costs and performance of the plan’s investment options.

American Funds EuroPacific Growth

The one American Funds option that I’ve used most over the years in 401(k) plans is the EuroPacific Growth fund.  This fund is a core large cap foreign stock fund.  It generally has some emerging markets holdings, but most of the fund is comprised of foreign equities from developed countries. The R6 share class is the least expensive of the retirement plan share classes. Let’s look at how the various share classes stack up in the disclosure format:

Share Class Ticker Expense Ratio Expenses per $1,000 invested Trailing 1-year return Trailing 3-year return Trailing 5-year return
R1 RERAX 1.58% $15.80 23.86% 9.51% 11.22%
R2 RERBX 1.56% $15.60 23.89% 9.52% 11.24%
R3 RERCX 1.12% $11.20 24.43% 10.02% 11.74%
R4 REREX 0.81% $8.10 24.81% 10.35% 12.08%
R5 RERFX 0.51% $5.10 25.19% 10.69% 12.42%
R6 RERGX 0.46% $4.60 25.27% 10.74% 12.47%

3-and 5-year returns are annualized.  Source:  Morningstar   Data as of 12/31/2020

While the chart above pertains only to the EuroPacific Growth fund, looking at the six retirement plan share classes for any of the American Funds products would offer similar relative results.   

The underlying portfolios and the management team are identical for each share class. The difference lies in the expense ratio of each share class.  This is driven by the 12b-1 fees associated with the different share classes. This fee is part of the expense ratio and is generally used all or in part to compensate the advisor on the plan.  In this case these advisors would generally be registered reps, brokers, and insurance agents. The 12b-1 fee can also revert to the plan to lower expenses. The 12b-1 fees by share class are:

R1                   1.00%

R2                   0.75%

R3                   0.50%

R4                   0.25%

R5 and R6 have no 12b-1 fees.

Growth of $10,000 invested

The real impact of expense differences can be seen by comparing the growth of $10,000 invested by a hypothetical investor on December 31, 2010 and held through December 31, 2020.

  • The $10,000 invested in the R1 shares would have grown to a value of $19,580.32.
  • The $10,000 invested in the R6 shares would have grown to a value of $21,880.57.

This is a difference of $2,300.25 or 11.7%. The portfolios of the two share classes of the fund are identical, the difference in performance is due to the difference in expenses for the two share classes. If you think of these as two retirement plan participants, one whose plan uses the R1 share class and the other whose plan uses the R6 share class, the first investor would have 11.7% less after ten years due to their plan sponsor’s choice regarding which fund share class to offer.

This analysis assumes a one-time investment of $10,000 and the reinvestment of all distributions. Morningstar’s Advisor Workstation was used to perform this analysis.

Share classes matter

The R1 and R2 shares have traditionally been used in plans where the 12b-1 fees are used to compensate a financial salesperson. This is fine as long as that salesperson is providing a real service for their compensation and is not just being paid to place the business.

If you are a plan participant and you notice that your plan has one or more American Funds choices in the R1 or R2 share classes, in my opinion you probably have a lousy plan due to the extremely high expenses charged by these share classes. It is incumbent upon you to ask your employer if the plan can move to lower cost shares or even a different provider. The R3 shares are a bit of an improvement but still quite pricey for a retirement plan in my opinion.

To be clear, I’m generally a fan of the American Funds. Overall however, their funds tend to offer a large number of share classes between their retirement, non-retirement and 529 plan shares. While the overall portfolios are generally the same, it’s critical for investors and retirement plan sponsors to understand the differing expense structures and the impact they have on potential returns.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Photo credit:  Flickr

Small Business Retirement Plans – SEP-IRA vs. Solo 401(k)

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One of the best tax deductions for a small business owner is funding a retirement plan. Beyond any tax deduction you are saving for your own retirement.  As a fellow small businessperson, I know how hard you work.  You deserve a comfortable retirement. If you don’t plan for your own retirement who will? Two popular small business retirement plans are the SEP-IRA and Solo 401(k).

Small Business Retirement Plans – SEP-IRA vs. Solo 401(k)

SEP-IRA vs. Solo 401(k)

SEP-IRA Solo 401(k)
Who can contribute? Employer contributions only. Employer contributions and employee deferrals.
Employer contribution limits The maximum for 2020 is $57,000, this has been increased to $58,000 for 2021. Contributions are deductible as a business expense and are not required every year. For 2020, the employer plus employee combined contribution limit is a maximum of 25% of compensation up to the maximums are $57,000 and $63,500, respectively. These have been increased to $58,000 and $64,500 for 2021. Employer contributions are deductible as a business expense and are not required every year.
Employee contribution limits A SEP-IRA only allows employer contributions. Employees can contribute to an IRA (Traditional or Roth, based upon their individual circumstances). $19,500 for 2020 and 2021. An additional $6,500 catch-up contribution is available for participants 50 and over. In no case can this exceed 100% of their compensation.
Eligibility Typically, employees must be allowed to participate if they are over age 21, earn at least $600 annually, and have worked for the same employer in at least three of the past five years. No age or income restrictions. Business owners, partners and spouses working in the business. Common-law employees are not eligible.

Note the Solo 401(k) is also referred to as an Individual 401(k).

  • While a SEP-IRA can be used with employees in reality this can become an expensive proposition as you will need to contribute the same percentage for your employees as you defer for yourself. I generally consider this a plan for the self-employed.
  • Both plans allow for contributions up your tax filing date, including extensions for the prior tax year. Consult with your tax professional to determine when your employee contributions must be made. The Solo 401(k) plan must be established by the end of the calendar year.
  • The SEP-IRA contribution is calculated as a percentage of compensation. If your compensation is variable the amount that you can contribute year-to year will vary as well. Even if you have the cash to do so, your contribution will be limited by your income for a given year.
  • By contrast you can defer the lesser of $19,500 ($26,000 if 50 or over) or 100% of your income for 2020 and 2021 into a Solo 401(k) plus the profit sharing contribution. This might be the better alternative for those with plenty of cash and a variable income.
  • Loans are possible from Solo 401(k)s, but not with SEP-IRAs.
  • Roth feature is available for a Solo 401(k) if allowed by your plan document. There is no Roth feature for a SEP-IRA.
  • Both plans require minimal administrative work, though once the balance in your Solo 401(k) account tops $250,000, the level of annual government paperwork increases a bit.
  • Both plans can be opened at custodians such as Charles Schwab, Fidelity, Vanguard, T. Rowe Price, and others. For the Solo 401(k) you will generally use a prototype plan. If you want to contribute to a Roth account, for example, ensure that this is possible through the custodian you choose.
  • Investment options for both plans generally run the full gamut of typical investment options available at your custodian such as mutual funds, individual stocks, ETFs, bonds, closed-end funds, etc. There are some statutory restrictions so check with your custodian.
  • For those wishing to invest in alternative assets inside of their SEP or solo 401(k), a number of self-directed retirement plan custodians offer this option.

Both plans can offer a great way for you to save for retirement and to realize some tax savings in the process. Whether you go this route or with some other option I urge to start saving for your retirement today 

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Photo credit Flickr

Review Your 401(k) Account

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For many of us, our 401(k) plan is our main retirement savings vehicle. The days of a defined benefit pension plan are a thing of the past for most workers and we are responsible for the amount we save for retirement and how we invest that money.

Managed properly, your 401(k) plan can play a significant role in providing a solid retirement nest egg. Like any investment account, you need to ensure that your investments are properly allocated in line with your goals, time horizon and tolerance for risk.

Photo by Aidan Bartos on Unsplash

You should thoroughly review your 401(k) plan at least annually. Some items to consider while doing this review include:

Have your goals or objectives changed?

Take time to review your retirement goals and objectives. Calculate how much you’ll need at retirement as well as how much you need to save annually to meet that goal. Review the investments offered by the plan and be sure that your asset allocation and the investments selected dovetail with your retirement goals and fit with your overall investment strategy including assets held outside of the plan.

Are you contributing as much as you can to the plan?

Look for ways to increase your contribution rate. One strategy is to allocate any salary increases to your 401(k) plan immediately, before you get used to the money and find ways to spend it. At a minimum, make sure you are contributing enough to take full advantage of any matching contributions made by your employer. For 2020 the maximum contribution to a 401(k) plan is $19,500 plus an additional $6,500 catch-up contribution for individuals who are age 50 and older at any point during the year. These limits are unchanged for 2021.

Are the assets in your 401(k) plan properly allocated?

Some of the more common mistakes made when investing 401(k) assets include allocating too much to conservative investments, not diversifying among several investment vehicles, and investing too much in an employer’s stock. Saving for retirement typically encompasses a long time frame, so make investment choices that reflect your time horizon and risk tolerance. Many plans offer Target Date Funds or other pre-allocated choices. One of these may be a good choice for you, however, you need to ensure that you understand how these funds work, the level of risk inherent in the investment approach and the expenses.

Review your asset allocation as part of your overall asset allocation

Often 401(k) plan participants do not take other investments outside of their 401(k) plan, such as IRAs, a spouse’s 401(k) plan, or holdings in taxable accounts into consideration when allocating their 401(k) account.

Your 401(k) investments should be allocated as part of your overall financial plan. Failing to take these other investment assets into account may result in an overall asset allocation that is not in line with your financial goals.

Review the performance of individual investments, comparing the performance to appropriate benchmarks. You shouldn’t just select your investments once and then ignore them. Review your allocation at least annually to make sure it is correct. If not, adjust your holdings to get your allocation back in line. Selling investments within your 401(k) plan does not generate tax liabilities, so you can make these changes without any tax ramifications.

Do your investments need to be rebalanced?

Use this review to determine if your account needs to be rebalanced back to your desired allocation. Many plans offer a feature that allows for periodic automatic rebalancing back to your target allocation. You might consider setting the auto rebalance feature to trigger every six or twelve months.

Are you satisfied with the features of your 401(k) plan?

If there are aspects of your plan you’re not happy with, such as too few or poor investment choices, take this opportunity to let your employer know. Obviously do this in a constructive and tactful fashion. Given the recent volume of successful 401(k) lawsuits employers are more conscious of their fiduciary duties and yours may be receptive to your suggestions.

The Bottom Line

Your 401(k) plan is a significant employee benefit and is likely your major retirement savings vehicle. It is important that you monitor your account and be proactive in managing it as part of your overall financial and retirement planning efforts.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring in two areas: the financial transition to retirement or small business financial coaching.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

4 Benefits of Portfolio Rebalancing

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The past couple of years have been a roller coaster ride in the stock market. The S&P 500 lost 4.38% in 2018 mostly from a poor fourth quarter performance. The market recovered nicely in 2019 with the index posting a 31.49% total return for the year. This trend seemed to be continuing into 2020, with the index hitting a record high in late February.

Then the markets felt the impact of COVID-19. By late March the index had plummeted over 33% from its all-time high reached only a month prior. Since then, however, the stock market has recovered nicely with the S&P 500 closing at an all-time high yesterday.

The recovery in the markets has been an uneven one. Growth stocks have led the way, while value has largely lagged. Apple’s shares are up over 70% year-to-date, Amazon is up almost 78% and Microsoft is up over 36%.

With all of these gyrations among various asset classes over the past couple of years, you may be taking on more or less risk than is appropriate for your situation. If you haven’t done so recently, this is a good time to consider rebalancing your investments. Here are four benefits of portfolio rebalancing.

4 Benefits of Portfolio Rebalancing

Balancing risk and reward

Asset allocation is about balancing risk and reward. Invariably some asset classes will perform better than others. This can cause your portfolio to be skewed towards an allocation that takes too much risk or too little risk based on your financial objectives.

During robust periods in the stock market equities will outperform asset classes such as fixed income. Perhaps your target allocation was 65% stocks and 35% bonds and cash. A stock market rally might leave your portfolio at 75% stocks and 25% fixed income and cash. This is great if the market continues to rise but you would likely see a more pronounced decline in your portfolio should the market experience a sharp correction.

Portfolio rebalancing enforces a level of discipline

Rebalancing imposes a level of discipline in terms of selling a portion of your winners and putting that money back into asset classes that have underperformed.

This may seem counterintuitive but market leadership rotates over time. During the first decade of this century emerging markets equities were often among the top performing asset classes. Fast forward to today and their performance has been much more muted.

Rebalancing can help save investors from their own worst instincts. It is often tempting to let top performing holdings and asset classes run when the markets seem to keep going up. Investors heavy in large caps, especially those with heavy tech holdings, found out the risk of this approach when the Dot Com bubble burst in early 2000.

Ideally investors should have a written investment policy that outlines their target asset allocation with upper and lower percentage ranges. Violating these ranges should trigger a review for potential portfolio rebalancing.

A good reason to review your portfolio

When considering portfolio rebalancing investors should also incorporate a full review of their portfolio that includes a review of their individual holdings and the continued validity of their investment strategy. Some questions you should ask yourself:

  • Have individual stock holdings hit my growth target for that stock?
  • How do my mutual funds and ETFs stack up compared to their peers?
    • Relative performance?
    • Expense ratios?
    • Style consistency?
  • Have my mutual funds or ETFs experienced significant inflows or outflows of dollars?
  • Have there been any recent changes in the key personnel managing the fund?

These are some of the factors that financial advisors consider as they review client portfolios.

This type of review should be done at least annually and I generally suggest that investors review their allocation no more often than quarterly.

Helps you stay on track with your financial plan 

Investing success is not a goal unto itself but rather a tool to help ensure that you meet your financial goals and objectives. Regular readers of The Chicago Financial Planner know that I am a big proponent of having a financial plan in place.

A properly constructed financial plan will contain a target asset allocation and an investment strategy tied to your goals, your timeframe for the money and your risk tolerance. Periodic portfolio rebalancing is vital to maintaining an appropriate asset allocation that is in line with your financial plan.

The Bottom Line 

Regular portfolio rebalancing helps reduce downside investment risk and ensures that your investments are allocated in line with your financial plan. It also can help investors impose an important level of discipline on themselves.

How has the volatility in the stock market impacted your investments and your financial plan? Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if its right for you. Financial coaching focuses on providing education and mentoring for the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

7 Tips to Become a 401(k) Millionaire

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According to Fidelity in an update released in February of this year, the average balance of 401(k) plan participants stood at $112,300, up 7 percent from the balance at the end of the prior quarter. This data is from plans using the Fidelity platform. This came on the heels of significant gains in the stock market in 2019. It will be interesting to see how these numbers change in the wake of the market volatility from the fallout of COVID-19.

Fidelity indicates that about 441,000 401(k) participants and IRA account holders had a balance of $1 million or more, What is their secret? Here are 7 tips to become a 401(k) millionaire or to at least maximize the value of your 401(k) account.

Be consistent and persistent 

Investing in your 401(k) plan is more of a marathon than a sprint. Maintain and increase your salary deferrals in good markets and bad.

Contribute enough 

In an ideal world every 401(k) investor would max out their annual salary deferrals to their plan which are currently $19,500 and $26,000 for those who are 50 or over.

If you are just turning 50 this year or if you are older be sure to take advantage of the $6,500 catch-up contribution that is available to you. Even if your plan limits the amount that you can contribute because of testing or other issues, this catch-up amount is not impacted. It is also not automatic so be sure to let your plan administrator know that you want to contribute at that level. 

According to a Fidelity study several years ago, the average contribution rate for those with a $1 million balance was 16 percent of salary. The 16 percent contribution rate translated to a bit over $21,000 for the millionaire group.

As I’ve said in past 401(k) posts on this site, it is important to contribute as much as you can. If you can only afford to defer 3 percent this year, that’s a start. Next year try to hit 4 percent or more. As a general rule it is a good goal to contribute at least enough to earn the full match if your employer offers one.

Take appropriate risks 

As with any sort of investment account be sure that you are investing in accordance with your financial plan, your age and your risk tolerance. I can’t tell you how many times I’ve seen lists of plan participants and see participants in their 20s with all or a large percentage of their account in the plan’s money market or stable value option.

Your account can’t grow if you don’t take some risk.  

Don’t assume Target Date Funds are the answer 

Target Date Funds are big business for the mutual fund companies offering them. They also represent a “safe harbor” from liability for your employer. I’m not saying they are a bad option but I’m also not saying they are the best option for you. Everyone’s situation is different, be sure you make the best investing decisions for your situation.

I like TDFs for younger investors say those in their 20s who may not have other investments outside of the plan. The TDF offers an instant diversified portfolio for them.

Once you’ve been working for a while you should have some outside investments. By the time you are in your 30s or 40s you should consider a portfolio more tailored to your situation.

Additionally Target Date Funds all have a glide path into retirement. They are all a bit different: you need to understand if the glide path offered by the TDF family in your plan is right for you. 

Invest during a long bull market 

This is a bit sarcastic but the bull market for stocks that started in March of 2009 and recently ended with the market decline in the wake of the COVID-19 pandemic, is in part why we’ve seen a surge in 401(k) millionaires and in 401(k) balances in general. The equity allocations of 401(k) portfolios have driven the values higher.

The flip side are those who swore off stocks at the depths of the 2008-2009 market downturn and have missed one of the better opportunities in history to increase their 401(k) balance and their overall retirement nest egg.

Don’t fumble the ball before crossing the goal line 

We’ve all seen those “hotdogs” running for a sure touchdown only to spike the ball in celebration before crossing the goal line.

The 401(k) equivalent of this is to just let your account run in a bull market like this one and not rebalance it back to your target allocation. If your target is 60 percent in stocks and it’s grown to 80 percent in equities due to the run up of the past few years you might well be a 401(k) millionaire.

It is just as likely that you may become a former 401(k) millionaire if you don’t rebalance. The stock market has a funny way of punishing investors who are too aggressive or who don’t manage their investments.

Pay attention to those old 401(k) accounts 

Whether becoming a 401(k) millionaire in your current 401(k) account or combined across several accounts, the points mentioned above still apply. In addition it is important to be proactive with your 401(k) account when you leave a job. Whether you roll the account over to an IRA, leave it in the old plan or roll it to a new employer’s plan, make a decision. Leaving an old 401(k) account unattended is wasting this money and can hinder your retirement savings efforts.

The Bottom Line 

Whether you actually amass $1 million in your 401(k) or not, the goal is to maximize the amount accumulated there for retirement. The steps outlined above can help you to do this. Are you ready to start down the path of becoming a 401(k) millionaire?

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

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